TomTom and Garmin Lose Their Way

Makers of navigation devices like to joke that their products can save marriages. Buyers need never fight with a spouse over whether to stop and ask for directions.

The navigation-device industry could use a little saving of its own.

Companies like TomTom and Garmin that build navigation devices are facing a barrage of competition from cell-phone makers and slumping demand from consumers who are putting off purchases as the economy falters. For some, weakness in the U.S. dollar is adding to pressure that's curbing sales and eroding profit margins.

TomTom Domino Effect

The latest evidence of trouble came on Apr. 8 when Amsterdam-based TomTom trimmed its sales outlook for the first quarter, citing competition and falling prices. "Nervousness…due to the global economic slowdown and the growing availability of personal navigation on mobile phones have conspired to make things more difficult for TomTom," says analyst Ben Wood at CCS Insight.

TomTom expects sales of €260 million to €270 million ($408 million), a decline from a year earlier. Full-year sales will be €1.8 billion to €2 billion, a slight improvement from 2007. TomTom said it was forced to reduce retail prices earlier than originally planned, and that retailers slashed inventories more than expected amid declining consumer spending. Shares plummeted almost 14% in Amsterdam.

Competing device makers fell in tandem. Shares of TomTom's main U.S.-based rival, Garmin (GRMN), tumbled more than 8%, to close at 48.47, a 52-week low. The stock is off 61% from its record 125.68, reached mid-2007. SIRF Technology (SIRF), a supplier of the global positioning system chips used in navigation devices, fell about 7.5% to close at 5.16, more than 83% lower than its 52-week high set last year.

Shriveling Margins

Personal navigation device (PND) sales surged in recent years as consumers snapped up these compact, mobile gadgets that use mapping technology and GPS signals to help users find their way around. But cell-phone makers such as market leader Nokia (NOK) are incorporating navigation technology directly into handsets, rendering some PNDs obsolete (BusinessWeek, 11/26/07).

It doesn't help that handset makers can offer big subsidies, adding to price pressure. "Nokia's ultimate goal is to make navigation in mobile phones as ubiquitous as cameras," Wood says. "The challenge for TomTom is they sell into the standard retail channel where subsidies are not available."

Nokia plans to include navigation features in roughly half of its phones in the next two to four years, Wood says. And while TomTom will sell 14 million to 15 million devices this year, Nokia will sell some 400 million phones this year, roughly half of which will be navigation-ready.

Consumers bought more than 22 million PNDs in 2007 and are expected to buy more than 32 million this year, says Richard Robinson, an analyst at market research firm iSuppli. But the average selling price on a PND in 2007 was $249, less than half the 2004 average of $505. Margins are slipping, too. "These companies got used to making profit margins of 45% to 60% during the 2004 to 2005 time frame," Robinson says. "Now they're having to contend with margins that are closer to 18% to 20%. That's not ringing well with the financial guys. The problem is you can only make so much on each unit you sell."

Dash Is Ahead

Olathe (Kan.)-based Garmin is also hampered as weakness in the U.S. dollar boosts costs of doing business overseas. "Garmin may have sold more units worldwide than TomTom, but we think TomTom made more money," Robinson says. While the two companies are roughly even with world market shares of 33%, Garmin had a slight edge, having sold some 90,000 more units than TomTom, he says.

Then there's competition from other players, including Magellan Navigation, and Taiwan's Mitac International, which manufactures PNDs under the Mio and Navman brands. Mitac drew attention during the 2006 holiday season by selling devices at dramatically reduced prices, forcing Garmin and TomTom to follow suit (BusinessWeek.com, 12/12/06). "The experience of navigation is becoming commoditized," Robinson says. "They're having a hard time finding a unique selling point."

One vendor that may break the PND mold is Dash Navigation, a Silicon Valley-based startup, Robinson says. The company's Dash Express device connects to wireless phone networks to download constantly updated traffic and weather information, and can also load live gas prices and display them on a map of nearby gas stations. Dash sells its devices through Amazon.com (AMZN), but eventually hopes to license the technology to other manufacturers. "They have really gotten way ahead of the curve," Robinson says of Dash. "They are where everyone else in the industry needs to be now."

Garmin Phone on the Way

Some navigation device makers are trying to cope through consolidation. TomTom shook up the industry last year when it made an unexpected $2.3 billion bid to acquire TeleAtlas, a Dutch maker of mapping software used in PND devices and one of the two companies serving the entire PND industry. TomTom ultimately won the bidding war that ensued with Garmin. The other mapping technology vendor, Navteq (NVT), is being acquired by Nokia (BusinessWeek.com, 11/16/07).

Controlling TeleAtlas, which licenses mapping data to scores of PND makers, will give TomTom a hedge against declining hardware revenue. The company's future may lie in wireless phones as well. "TomTom has got to leverage its strong brand and license it to phone manufacturers like Sony Ericsson and Samsung," Wood says. "Just as we have seen camera lens brands being used in mobile phones, TomTom should exploit its brand power and offer mobile-phone solutions powered by TomTom."

Garmin has its eye on phones, too. In January it unveiled the Nuvifone, a wireless phone with a large screen that contains a navigation system. Somewhat similar in appearance to Apple's (AAPL) iPhone, the Nuvifone is expected to ship in the third or fourth quarter of this year, possibly extending a salve to a troubled industry.